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Green, social and sustainability bonds are no different than traditional bonds in terms of their structure and sale, but labeled bonds may only be used for eligible activities. They offer additional elements of transparency and often include an external review which attests to the environmental and/or social benefits of the funded activities, and conformance with ICMA’s Principles or CBI’s Climate Bonds Standard.
Bonds that finance activities in the following sectors may be eligible for green bonds designation:
Public agencies have many motivations for using green, social or sustainability bonds.
Green, social and sustainability bonds are no different than traditional bonds in terms of their structure and sale, but labeled bonds may only be used for eligible activities. They offer additional elements of transparency and often include an independent external review which attests to the environmental and/or social benefits of the funded activities, and conformance with various standards.
A sustainability bond finances or refinances activities that provide both environmental and social benefits. The ICMA’s Sustainability Bond Guidelines outline the criteria and intention for the sustainability bond label.
The focus of a social bond should be on providing a benefit to a target population, which in some cases can be defined as the general public. Eligible activities in these sectors often qualify:
No. While municipal bonds are generally focused on providing a public benefit, not every muni bond has a clear environmental or social benefit, or meets the ICMA standards. Bonds often have mixed uses of proceeds. Not all activities are green. Investors, wary of “greenwashing” or “impact washing,” look for a qualified Second Party Opinion to provide additional assurance.
The purpose of a Second Party Opinion is to clearly identify and sometimes quantify the environmental or social benefits of the bond-financed activities, in order to give investors a higher degree of confidence that these benefits are in fact real. The external review also confirms that the bond conforms with internationally accepted standards. “Greenwashing” or “social washing” occurs when environmental or social benefits are claimed inappropriately.
Sustainability attributes often have the added benefit of mitigating certain risks. Where appropriate, Kestrel includes discussion of resilience features and risk mitigants in the Second Party Opinion. Second Party Opinions from Kestrel include benchmarking with Kestrel Sustainability Intelligence.
With our deep background in consulting to state and local governments, and diverse experience with infrastructure and capital projects, the Kestrel team adds value on every transaction.
Kestrel can deliver Second Party Opinions in a matter of days when transactions require an accelerated timeline. Many engagements are planned over several weeks to allow time for discussions and internal review by financing teams and counsel. However, the analytical work itself can be completed quickly.
Benefits of using green and social bonds can also be seen within the organization, as the process can facilitate alignment of internal social and/or environmental directives. As part of evaluating how a bond aligns with the entity’s mission or purpose, there can be renewed focus within the organization on expanding positive impacts.
Researchers from Wharton have found clear evidence of investors paying more for bonds that have verified infrastructure information in the form of Kestrel Sustainability Scores, regardless of green or social designations. Read a summary of the research from Wharton.
Demand for green, social, and sustainability bonds with independent, external reviews is increasing and in some cases has resulted in a pricing premium. The Climate Bonds Initiative 2023 Green Bond Pricing Report described tighter spreads and more oversubscription on green bonds versus non-green counterparts.
Post-issuance reporting is typically included in our engagement. We also encourage issuers to report meaningful metrics and make it easy for investors to find this information. Issuers in some sectors such as healthcare or affordable housing already report on the bond-financed activities, so it is just a matter of making that information easier for investors to find.
The full benefit of a green or social bond may not be realized unless an issuer plans to tell investors what was achieved. Certain investors consider the availability of impact information in making their decisions to buy.
Kestrel has worked with state and local governments, non-profits and corporate entities in a wide variety of sectors across the US and Europe. We are the market leaders for Second Party Opinions in US Public Finance, but we work across the globe.
We are known for reliable execution aligned with transaction deadlines.